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Bob Mason

As the markets enter the mid-way point of the 2nd quarter, risk appetite has come under pressure once more.

The coronavirus pandemic allowed the global financial markets to brush aside some quite dire economic data of late. It was justifiable to a point, which has now passed…

We saw record low private sector PMIs, the largest increases in jobless claims, and more.

In fact, April stats were the worst on record across the board and, while the U.S economic contraction may not have been as severe as the Great Depression, things are not looking much better for the 2nd quarter.

So, as we pass through to May stats, the markets will likely be far more sensitive to the economic calendar.

Unfortunately for the more bullish, FED Chair Powell tempered market expectations on Wednesday.

The U.S government now needs to find a difficult balance to reignite the U.S economy.

On the one hand, lockdown measures need to ease at a quick enough pace to drive rehiring. There is another issue that the government does have to consider, however.

The U.S, alongside other geographies most severely impacted by COVID-19, also faces the possibility of a 2nd wave pandemic.

May Stats

As the markets begin to consider May stats, there should be an uptick from the, particularly dire, stats from March and April.

The bigger question, however, is whether market expectations have been managed by recent central bank commentary.

On Wednesday, FED Chair Powell talked of challenging times ahead. Other central bankers have talked from the same hymn sheet. The RBA and the RBNZ also talked of challenging times, with the ECB and BoE also on the same page.

So, when considering all the doom and gloom, what will it really take to deliver that market correction?

A continued slide in employment and consumer spending would certainly send the global financial markets into a spin.

With the global supply chain broken, service sector activity will have to be the area of focus. It is a chicken and egg situation, however.

Governments may have delivered unprecedented fiscal policy support and may well deliver more. Central banks have also thrown in the kitchen sink, some more than others…

It isn’t going to be enough, however, if consumer and business confidence continues to trail.

Business confidence is going to need to see a marked pickup to support a more optimistic outlook on hiring.

Only then can labor market conditions improve and support a pickup in consumption.

Gamesmanship and Geopolitics in Play

It’s not surprising that U.S President Trump was somewhat aggrieved by disease expert Dr. Fauci’s stark warning of reopening the economy too soon.

Throw in FED Chair Powell’s concerns over bankruptcies and that pace of hiring could materially lag market and government expectations.

Not only did Fauci’s comments come just ahead of Powell’s speech but also came off the back of news from Asia of a pickup in new coronavirus cases in South Korea and China.

I would anticipate that the situation should, in fact, be far worse across the EU.

For governments across the EU, they will also face the issue of border control and migration.

It would make perfect sense for freedom of movement to become an issue for voters across EU member states.

Let’s not forget that freedom of movement is the EU’s headline banner, as the British government discovered in the early days of Brexit negotiations.

The Eternal Optimist

For those believing that the latest pullback in risk appetite is yet another brief visit into the red, crunch time is approaching…

As lockdown measures continue to ease, the U.S and the EU, amongst other economies, must avoid another surge in new COVID-19 cases.

Such an outcome would deliver the consumer and business confidence needed to support an economic recovery.

It could go horribly wrong, however. Such an outcome would surely bring the Dollar ever closer to parity with the EUR. It would also raise bigger questions over the viability of the EU project.

Messages from Brussels have had a change of tone of late. The last thing that EU President Von der Leyen needs is another member state to join Britain in the departure lounge.

With Asia continuing to struggle and Britain entering dark times, even the more hawkish central banker will need to take a more cautious approach when discussing the economic outlook.

For the eternal optimist, the good news is that the global economy will recover.

Expecting riskier assets to find continued support and avoid a return to pre-Trump election levels, however, may be too big an ask…

After all, there is only so much massaging that a market can stomach.

At the time of writing, the EUR was down by 0.36% to $1.07790. How did the markets respond to a 2.981m surge in jobless claims, according to figures released today?


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